Fee disclosure is coming to your 401(k)

With or without help from lawmakers, momentum is growing for more clarity on fees

BOSTON (MarketWatch) -- Investors lost a battle this week, but the war isn't over. Lawmakers in the Senate decided to drop a measure that would have forced the 401(k) industry to disclose fees to participants. But that's OK, because the numbers still favor retirement savers.

There are 50 million 401(k) participants who deserve to know how much they are paying for their retirement account. By contrast, there are just a few dozen lawmakers and few dozen lobbying groups that don't want 401(k) investors to know just how much things cost.

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Now don't get me wrong. Those who advocate against 401(k) fee disclosure make some valid points. It's quite possible that the systems in place can't produce the reports that would be mandated. It's quite possible that investors might not use or they might not understand the fee information.

But that doesn't mean it can't be done or that it shouldn't. After all, many vendors are capable of telling customers what things costs and do tell customers what things cost. And most customers are able to make sense of those numbers. For instance, hospitals tell patients not just the cost of a blood test, but the costs associated with testing every single element of our blood, including good and bad cholesterol and triglycerides. Car dealers reveal to customers the costs associated with buying a car, including the holdback and wholesale financial reserves.

Lawmakers are more than welcome to drag their collective feet on this one. They are more than welcome to buy into the lobbying groups' point of view on this one. But investors will win the war if visionaries and watchdogs get their way.

Putnam leads the way

Consider: In May, Putnam Investments became the first mover. The company is disclosing all of the fees in the defined-contribution plans it manages, including investment management, servicing (including advisory fees), and recordkeeping. For plan sponsor executives, Putnam will break out asset manager revenue from servicing revenue -- and show the amounts paid to every investment management firm that offers funds to a retirement plan. What's more, Putnam will identify adviser payments, and disclose specific dollar costs for recordkeeping and plan servicing. Putnam is disclosing these fees first to plan sponsor executives and later this summer to plan participants. To plan participants, Putnam plans to provide fund expense ratios, transaction fees, and other information.

There's plenty to debate about why Putnam did this. Some say it was nothing more than a public relations ploy in an extremely competitive 401(k) market that has Putnam trying to takeaway business from those firms with a larger share of the market.

Putnam says it's doing it for the right reasons, acting in the best interest of 401(k) plan participants. "We believe working people and employers have a right to know exactly what they are paying for all elements of their 401(k)s and other retirement plans and that financial service providers have an obligation to offer them this information and explain the value they're paying for," Robert Reynolds, Putnam's president and chief executive, said in a release in May. Read that release.

No matter the reason, Putnam will force 401(k) plan providers to follow suit, especially once plan participants and sponsors start demanding it from their current providers.

"Other providers will follow," Ary Rosenbaum of The Rosenbaum Law Firm wrote in a recent posting on LinkedIn about Putnam's plan to disclose fees. "Full fee disclosure is the future."

Others agree. "I am a huge fan of fee transparency; it is a hot-button topic with plan sponsors and advisers," Brian Douglas , a regional pension consultant at Retirement Alliance Inc. wrote on LinkedIn. "Bundled and un-bundled providers will have to follow suit and as a benefit it will create an environment where it's easier for advisers, consultants and/or plan sponsors to make an apples-to-apples comparison."

Putnam is not the first to disclose fees in the 401(k) market. Many record-keepers and third-party administrators already do so. But Putnam is thought to be the first of the big firms to do it.

Those in the 401(k) world, participants, sponsors and providers, are also waiting on the Labor Department to issue final regulations on 401(k) disclosure this month.

Expense ratios are 'not the holy grail'

To be fair, there are those who take a measured approach to the issue of fee disclosure.

"The concept of fee disclosure is good, period," said Ross Marino, chief executive of 401(k) Rekon, a provider of research and training for financial advisers. "It makes the market more competitive when sponsors and advisers are more informed. When there's full disclosure, it's a better market."

But Marino is also fearful of the unintended consequences of fee disclosure. If people become obsessed with fees, they might lose sight of the need to create a portfolio that's prudent, for instance. For instance, some investors might need an emerging growth fund, which tend to have high expense ratios compared to other funds, in their portfolio but opt for a low-cost fund that they don't need or that duplicates the investment objective of another fund.

"Expense ratios are just a data point, not the holy grail to success," Marino said. "An obsession with fees might leave people picking funds that aren't right for them."

Marino also envisions the possibility of plan providers and sponsors having to unbundle services and offering participants services a la carte. If that happens, participants might opt of services that they might need, such as investor education, Marino said.

Others are in the "yes, but" camp too. "Any disclosure that is too complex for the 'decider' to immediately grasp and use is counter-productive and is better left unstated," said Louis Harvey, president of Dalbar, a financial services market research firm. "For fees to be useful in decision making the 'decider' has to understand what the fees are and what they are buying," he said. "401(k) fees should be subjected to this standard. Instead of disclosing the complex sets of relationships, employers and employees would be well served with fee statements that showed the services provided and the dollars paid or anticipated. The breakdown of services provided should be limited to items that are familiar to the employer and employee."

So here we are. The Senate is now debating its version of the jobs bill, and it's possible lawmakers will reverse their decision to remove the fee disclosure provision. But if not, that's OK. Fee disclosure is really more a question of when -- not if.

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